Baby Steps: Congressional Action on Medicaid Reform

The House and
Senate are poised to move forward on a budget package that would
make modest administrative changes to one of the most unsustainable
health programs, Medicaid. While improving the program's efficiency
is important, Congress should go further and fundamentally reform
Medicaid. For Medicaid to survive, federal policymakers must work
with the states to make lasting improvements to the program so that
it can better serve those most in need.

Meeting the
Budget

This past spring,
the Senate and the House passed a budget reconciliation package in
which the Senate agreed to identify $35 billion in savings and the
House agreed to identify $50 billion. Now, the various
congressional authorizing committees must report their specific
plans to reach those goals. After both chambers pass their
approaches, they will have to meet to resolve the differences
between them.

The Senate Finance
Committee has proposed $10 billion in net savings from changes to
the Medicaid and Medicare programs. The proposal identifies $26.064
billion in savings but offsets those savings with $16.64 billion in
new spending. The committee identifies a meager $8 billion dollars
in savings in Medicaid (compared to $18.64 billion in Medicare) and
reallocates $3.72 billion of those savings to Medicaid and State
Children's Health Insurance Program (SCHIP) spending.

The House Energy
and Commerce Committee is expected to recommend an estimated $18
billion in net savings, with about $12 billion of that coming from
changes to the administration of Medicaid, leaving any Medicare
changes to the House Ways and Means Committee, which has indicated
it will not seek out Medicare savings.

Key Provisions

While there are
similarities between the Senate and the House Medicaid proposals,
the House approach is more aggressive in some areas and lays
important groundwork for future reform efforts in several
areas:

Medicaid's price controlled system distorts and adds layers of
complexity to the program, especially for prescription drugs.
Efforts to establish a formula based on more realistic prescription
drug costs are offset by new smoke-and-mirror payment schemes.
Congress should focus on transparency in all Medicaid reimbursement
and payment mechanisms, especially for prescription drugs.

Long-Term
Care: Both proposals establish stricter rules on asset
transfers for those seeking to qualify for long-term care services
under Medicaid. The House Energy and Commerce Committee, however,
is far more aggressive in stopping the gimmicks used by
middle-class families to qualify for Medicaid long-term care. Both
proposals would also encourage the purchase of private long-term
care policies based on state "long-term care partnership"
plans.

Unfortunately, the Senate Finance Committee does not go as far as
the House Energy and Commerce Committee in reforming long-term
care. It is imperative that Congress close the loopholes and end
the incentives that encourage middle-class families to shelter
their assets to qualify for Medicaid, to ensure the program remains
able to aid those who need it most.

Benefit and
Cost-Sharing Flexibility: The House Energy and Commerce
proposal takes important steps to allow states to better design
their Medicaid packages. The Senate Finance Committee proposal,
however, does not include any additional flexibility for the states
in this area. The Energy and Commerce proposal also includes
provisions to assist states in adopting consumer-directed
approaches, such as Cash and Counseling and Health Savings
Accounts.

Flexibility is an important feature for future reform, and it is
unfortunate that is does not appear in the Senate package. Greater
flexibility in benefit design and cost-sharing allows states to
provide different benefits to specific populations that have
varying health care needs. With states expanding Medicaid coverage
higher up the income scale, cost-sharing allows states to
differentiate between the truly indigent and those with some
financial means. Finally, consumer-directed models give states the
opportunity to apply proven market approaches to the Medicaid
population.

Additional Spending

Both the Senate
Finance Committee and the House Energy and Commerce Committee
propose new spending, offsetting the savings that they have
identified. The Senate Finance Committee sets aside additional
funding to provide Medicaid assistance to Katrina-impacted states.
It also expands Medicaid eligibility to families that have disabled
children and earn up to 300 percent Federal Poverty Level (FPL).
The House Energy and Commerce proposal sets aside some funds for
hurricane-related health care expenses and hurricane-related energy
relief.

Efforts to assist
the states in their efforts to provide health care following this
year's hurricanes are certainly important. However, the Senate's
Medicaid approach is far too prescriptive on the states and too
dependent on the Medicaid program.[1] The House Energy and
Commerce Committee should instead provide states with direct
funding in the form of grants, allowing each state to decide how
best to assist those in need and how to compensate providers for
their work. In the end, the Medicaid program cannot sustain further
expansions that will ultimately result in lower quality and less
care for those in need.

Conclusion

The budget
proposals from the Senate Finance Committee and the House Energy
and Commerce Committee are aimed at improving the efficiency of the
administration of the Medicaid program and will lead to minor
short-term savings. However, improved efficiency will not bring
lasting stability to the program. To save Medicaid, federal and
state policymakers must develop a multi-faceted approach to
improving the Medicaid program for its beneficiaries and the
future.[2]

States should look
for ways to mainstream more Medicaid-eligible individuals into
private health care coverage and should adopt more care-management
and consumer-directed techniques to improve quality and
satisfaction for those who must remain on the program.

Federal
policymakers should draw on the lessons of welfare reform and
provide states with greater flexibility to experiment with
different approaches to meet federal goals and benchmarks. They
should also enact other key health policy initiatives, such as
health care tax credits for lower-income Americans and incentives
for the purchase of private long-term care, to preserve and protect
Medicaid for those truly in need.

Nina
Owcharenko is Senior Policy Analyst in the Center for
Health Policy Studies at The Heritage Foundation.

[1] For more information on
the problems with the Senate approach to Hurricane Katrina-related
health care, see Nina Owcharenko, "Katrina Victims Deserve Better
than Medicaid," Heritage Foundation WebMemo No. 862,
September 26, 2005 at http://www.heritage.org/Research/HealthCare/wm862.cfm.

[2] For a more detailed
outline of the problems and solutions for real Medicaid reform, see
Nina Owcharenko, "A Roadmap for Medicaid Reform," Heritage
Foundation Backgrounder No. 1863, July 21, 2005, at www.heritage.org/Research/HealthCare/bg1863.cfm.

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